The paper compared the performance of firms whose grants are based on the value of options with those whose grants are based on a fixed number. That allowed the authors to establish a control group and isolate the causal effect between options and firm performance—something they say has been missing from previous studies.

Shue and Townsend found that a 10 percent increase in the value of new options granted leads to a 2–6 percent increase in firm equity volatility. And they concluded that this increase in risk is driven largely by an increase in leverage.

“We also find that an increase in stock options leads to lower dividend growth, with mixed effects on investment and firm performance,” the authors wrote, though they concluded that the effect on firms’ performance is usually negative.

Shue and Townsend also found that the effect is greater in the technology and financial sectors, where executives may have more ability to affect risk in ways other than through increased leverage.Shue noted that these effects “are not outrageous,” contrasting them with their characterization in the media that they produced “extreme risk.” She also observed that options grants can have a positive impact on companies led by risk-averse executives.

“Moderate increases in options may be an effective way to encourage executives to increase risk-taking,” the authors wrote.